TOKYO, Feb 26 (Reuters) - Asian shares declined on Tuesday
and the euro hit its lowest in nearly seven weeks against the
dollar as an apparently deadlocked election in Italy raised the
spectre of a resurgent euro zone debt crisis.

Italy's main FTSE MIB stock market index is
expected to open down 2.5 percent, while other European markets
are also seen slumping with financial spreadbetters predicting
London's FTSE 100, Paris's CAC-40 and
Frankfurt's DAX would open down as much as 2.6 percent.
U.S. stock futures were flat to suggest a cautious Wall
Street start.

"There's a possibility that the Italians might be heading
back to the polls. In the short term, investors and traders
don't like the uncertainty," said Ben Le Brun, market analyst at
OptionsXpress in Sydney.

Italy's centre-left coalition will win a majority in the
lower house of parliament but the upper house will be
deadlocked, the Interior Ministry said on Tuesday after almost
all votes were counted. No party or coalition won a majority of
seats in the Senate, which a government would need to pass
legislation.

A split parliament in the euro zone's third-largest economy
is seen as likely to paralyse any new government and potentially
reignite the euro-zone debt crisis.

"Financial markets will now have to take at face value the
idea that the protest vote can actually attain an overall
majority in some parts of Europe's legislatures. This is indeed
a worrying development and one that should rattle financial
markets for some time to come," Westpac said in a note.

The yen and the euro stabilised and Asia's overall equities
losses were less severe than U.S. benchmark Standard & Poor's
500 Index which suffered its worst one-day percentage
decline since Nov. 7 with a 1.8 percent tumble on Monday.

Southeast Asian shares, which have hit record highs
recently, posted a larger drop, with the Philippines
plunging 1.2 percent after a record finish on Monday and
Indonesian stocks tumbling 0.9 percent after also closing
at a record on Monday.

U.S. crude slid 0.8 percent to $92.34 a barrel and
Brent fell 0.7 percent to $113.61.

Spot gold inched down 0.2 percent to $1,591.01 an
ounce, but London copper edged up 0.3 percent to $7,862
a tonne.

"Volatile overnight markets discouraged those who had not
been able to buy at the dips, while a lack of clear direction as
well as growing risks have also reduced incentives for investors
to venture out into the markets," said Tetsu Emori, a
commodities fund manager at Astmax Investments in Tokyo.

YEN FIRMING HALTS

The yen resumed its retreat after firming sharply on Monday
when nervousness about Italy exposed the yen to sharp reversals
from its recent steep losses on bets of aggressive reflationary
monetary policy in Japan.

The yen traded down 0.2 percent against the dollar at 91.93
after gaining 2 percent to 90.85 on Monday from its
intraday low of 94.77 touched earlier in the day, its lowest
since May 2010. The yen was also down 0.3 percent against the
euro to 119.99 after jumping more than 3 percent to
118.74 on Monday from its day's low of 125.36.

The yen's overnight appreciation hit Japan's Nikkei stock
average, with the index tumbling 2.3 percent after
closing at a 53-month high the day before.

Traders said the plunge in the dollar and the euro against
the Japanese currency has provided fresh opportunities to buy
these currencies against the yen, with many market players still
seeing a weak yen trend continuing.

But the euro fell to its lowest in nearly seven weeks at
$1.3042 on jitters that political gridlock in Italy will hamper
the country's efforts to reform and slash its debts.

"Uncertainty over the Italian election outcome and its
impact will certainty keep the euro under strong pressure for
some time," said Yuji Saito, director of foreign exchange at
Credit Agricole in Tokyo.

"A safety net has been provided over the past year in the
euro zone and given the size of Italy's economy, I doubt that
the situation will turn into a disaster, but we need to
carefully monitor developments. It revives memories of risks in
the euro zone," Saito added.

The focus will now be on an Italian treasury bill auction on
Tuesday when borrowing costs could rise, given the Senate
election result.

Investors also await testimony later in the day from Federal
Reserve Chairman Ben Bernanke for further clues to when the Fed
intends to slow down or stop its bond-buying programme.

Financial markets were rattled last week by minutes of the
Fed's January meeting showing some Fed officials were mulling
scaling back its strong monetary stimulus earlier than expected.

Dennis Lockhart, president of the Federal Reserve Bank of
Atlanta, said on Monday that U.S. economic growth could surpass
expectations this year, but an anaemic labour market requires
ongoing support from monetary policy.

The United States also faces downside risks to its economy
if $85 billion in government-wide "sequestration" spending cuts
go ahead on March 1.